Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

An institution is any structure or mechanism of social order and cooperation governing the behavior of a set of individuals within a given human community...

. The total value of an institution's investments is often referred to as the institution's endowment and is typically organized as a public charity, private foundation

Private foundation

A private foundation is a legal entity set up by an individual, a family or a group of individuals, for a purpose such as philanthropy. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets...

, or trust.

Among the institutions that commonly manage an endowment are: academic institutions (e.g., college

College

A college is an educational institution or a constituent part of an educational institution. Usage varies in English-speaking nations...

Private schools, also known as independent schools or nonstate schools, are not administered by local, state or national governments; thus, they retain the right to select their students and are funded in whole or in part by charging their students' tuition, rather than relying on mandatory...

An endowment may come with stipulations regarding its usage. In some circumstances an endowment may be required to be spent in a certain way or alternatively invested, with the principal to remain intact in perpetuity or for a defined time period. This allows for the donation to have an impact over a longer period of time than if it were spent all at once.

College and university endowments

Academic institutions, such as colleges and universities, will frequently control an endowment fund that finances a portion of the operating or capital requirements of the institution. In addition to a general endowment fund, each university may also control a number of restricted endowments that are intended to fund specific areas within the institution. The most common examples are endowed professorships (also known as named chairs), and endowed scholarship

Scholarship

A scholarship is an award of financial aid for a student to further education. Scholarships are awarded on various criteria usually reflecting the values and purposes of the donor or founder of the award.-Types:...

s or fellowships.

In the United States, the endowment is often integral to the financial health of private educational institutions, whereas public institutions are often funded partially or fully by state or local governments. Oftentimes, alumni of the institution will contribute the bulk of capital to the endowment. By contrast, universities in the United Kingdom are frequently public rather than private institutions. There is, therefore, less of an endowment funding culture, with financial figures generally much lower, with the exception of Cambridge

University of Cambridge

The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...

The University of Oxford is a university located in Oxford, United Kingdom. It is the second-oldest surviving university in the world and the oldest in the English-speaking world. Although its exact date of foundation is unclear, there is evidence of teaching as far back as 1096...

universities, which are exceptionally wealthy even by US standards. Endowment funds have also been created to support public secondary and elementary school districts in several states in the US.

Restricted endowments

Endowment revenue can be restricted by donors in numerous ways. Professorships and endowed scholarship/fellowships are the most common restriction on large donations to an endowment. The restricted/unrestricted distinction focuses on the use of the funds; see quasi-endowment below for a distinction about whether principal can be spent.

Endowed professorships

A professor is a scholarly teacher; the precise meaning of the term varies by country. Literally, professor derives from Latin as a "person who professes" being usually an expert in arts or sciences; a teacher of high rank...

ship (or endowed chair) is a position permanently paid for with the revenue from an endowment fund specifically set up for that purpose. Typically, the position is designated to be in a certain department. The donor is allowed to name the position, which typically takes the format: First-name Last-name Professor of Department-name. Endowed professorships aid the university by providing a faculty member who does not have to be paid entirely out of the operating budget, allowing the university to either reduce its student-to-faculty ratio, a statistic used for college rankings

College and university rankings

College and university rankings are lists of institutions in higher education, ordered by combinations of factors. In addition to entire institutions, specific programs, departments, and schools are ranked...

and other institutional evaluations, and/or direct money that would otherwise have been spent on salaries toward other university needs. In addition, holding such a professorship is considered to be an honor in the academic world, and the university can use them to reward its best faculty or to recruit top professors from other institutions.

The Roman Empire was the post-Republican period of the ancient Roman civilization, characterised by an autocratic form of government and large territorial holdings in Europe and around the Mediterranean....

An emperor is a monarch, usually the sovereign ruler of an empire or another type of imperial realm. Empress, the female equivalent, may indicate an emperor's wife or a woman who rules in her own right...

Philosophy is the study of general and fundamental problems, such as those connected with existence, knowledge, values, reason, mind, and language. Philosophy is distinguished from other ways of addressing such problems by its critical, generally systematic approach and its reliance on rational...

Athens , is the capital and largest city of Greece. Athens dominates the Attica region and is one of the world's oldest cities, as its recorded history spans around 3,400 years. Classical Athens was a powerful city-state...

in AD 176. Aurelius created one endowed chair for each of the major schools of philosophy: Platonism

Platonism

Platonism is the philosophy of Plato or the name of other philosophical systems considered closely derived from it. In a narrower sense the term might indicate the doctrine of Platonic realism...

Aristotelianism is a tradition of philosophy that takes its defining inspiration from the work of Aristotle. The works of Aristotle were initially defended by the members of the Peripatetic school, and, later on, by the Neoplatonists, who produced many commentaries on Aristotle's writings...

Stoicism is a school of Hellenistic philosophy founded in Athens by Zeno of Citium in the early . The Stoics taught that destructive emotions resulted from errors in judgment, and that a sage, or person of "moral and intellectual perfection," would not suffer such emotions.Stoics were concerned...

Epicureanism is a system of philosophy based upon the teachings of Epicurus, founded around 307 BC. Epicurus was an atomic materialist, following in the steps of Democritus. His materialism led him to a general attack on superstition and divine intervention. Following Aristippus—about whom...

. Later, similar endowments were set up in some other major cities of the Empire.

The practice was adapted to the modern university system beginning in England in 1502, when Lady Margaret Beaufort, Countess of Richmond and grandmother to the future king Henry VIII

Henry VIII of England

Henry VIII was King of England from 21 April 1509 until his death. He was Lord, and later King, of Ireland, as well as continuing the nominal claim by the English monarchs to the Kingdom of France...

, created the first endowed chairs in divinity at the universities of Oxford

University of Oxford

The University of Oxford is a university located in Oxford, United Kingdom. It is the second-oldest surviving university in the world and the oldest in the English-speaking world. Although its exact date of foundation is unclear, there is evidence of teaching as far back as 1096...

The University of Cambridge is a public research university located in Cambridge, United Kingdom. It is the second-oldest university in both the United Kingdom and the English-speaking world , and the seventh-oldest globally...

.

Nearly 50 years later, Henry VIII established the Regius Professorships at both universities, this time in five subjects: divinity, civil law, Hebrew, Greek, and physic—the last of those corresponding to what we now know as medicine and basic sciences. Today, the University of Glasgow

University of Glasgow

The University of Glasgow is the fourth-oldest university in the English-speaking world and one of Scotland's four ancient universities. Located in Glasgow, the university was founded in 1451 and is presently one of seventeen British higher education institutions ranked amongst the top 100 of the...

Sir Isaac Newton PRS was an English physicist, mathematician, astronomer, natural philosopher, alchemist, and theologian, who has been "considered by many to be the greatest and most influential scientist who ever lived."...

held the Lucasian Chair of Mathematics at Cambridge beginning in 1669, more recently held by the celebrated physicist Stephen Hawking

Stephen Hawking

Stephen William Hawking, CH, CBE, FRS, FRSA is an English theoretical physicist and cosmologist, whose scientific books and public appearances have made him an academic celebrity...

.

Endowed scholarship/fellowship

A scholarship is an award of financial aid for a student to further education. Scholarships are awarded on various criteria usually reflecting the values and purposes of the donor or founder of the award.-Types:...

is tuition (and possibly other cost) assistance that is permanently paid for with the revenue of an endowment fund specifically set up for that purpose. It can be either merit-based or need-based (which is only awarded to those students for whom the college expense would cause their family financial hardship) depending on university policy or donor preferences. Some universities will facilitate donors' meeting the students they are helping. The amount that must be donated to start an endowed scholarship can vary greatly.

Fellowships are similar, although they are most commonly associated with graduate students. In addition to helping with tuition, they may also include a stipend. Fellowships with a stipend may encourage students to work on a doctorate

Doctorate

A doctorate is an academic degree or professional degree that in most countries refers to a class of degrees which qualify the holder to teach in a specific field, A doctorate is an academic degree or professional degree that in most countries refers to a class of degrees which qualify the holder...

. Frequently, teaching or working on research is a mandatory part of a fellowship.

Financial operation

A financial endowment is typically overseen by a board of trustees and managed by a trustee or team of professional managers. The financial operation of the endowment is typically designed to achieve the stated objectives of the endowment.

At universities, typically 4-6% of the endowment's assets are spent every year to fund operations or capital spending. Any excess earnings are typically reinvested to augment the endowment and to compensate for inflation and recessions in future years. This spending figure represents the proportion that historically could be spent without diminishing the principal amount of the endowment fund. However, the financial crisis of 2007–2010 had a major impact on the entire range of endowments globally.

Most notably, large U.S.-based college and university endowments, which had posted large, highly publicized gains in the 1990s and 2000s faced significant losses of principal across a range of investments. The Harvard University

Harvard University

Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...

endowment fund, which held $37 billion on June 30, 2008, was reduced to $26 billion during the following year. Yale University

Yale University

Yale University is a private, Ivy League university located in New Haven, Connecticut, United States. Founded in 1701 in the Colony of Connecticut, the university is the third-oldest institution of higher education in the United States...

, the pioneer of an approach that involved investing heavily in alternative investments such as real estate and private equity

Private equity

Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....

, reported an endowment of $16 billion as of September 2009, a 30% annualized loss that was more than predicted in December 2008. At Stanford University

Stanford University

The Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university on an campus located near Palo Alto, California. It is situated in the northwestern Santa Clara Valley on the San Francisco Peninsula, approximately northwest of San...

, the nation's third-wealthiest university, the endowment was reduced from about $17 billion to $12 billion as of September 2009. Brown University

Brown University

Brown University is a private, Ivy League university located in Providence, Rhode Island, United States. Founded in 1764 prior to American independence from the British Empire as the College in the English Colony of Rhode Island and Providence Plantations early in the reign of King George III ,...

The George Washington University is a private, coeducational comprehensive university located in Washington, D.C. in the United States...

lost 18% in that same fiscal year, down to $1.08 billion.

Quasi-endowments

A quasi-endowment, or fund functioning as an endowment, are funds merely earmarked by an organization’s governing board, rather than restricted by a donor or other outside agency, to be invested to provide income for a long but unspecified period, and the governing board has the right to decide at any time to expend the principal of such funds. Separately from the endowment versus quasi-endowment distinction, there's another 2-way categorization of restricted and unrestricted, which focuses on the use of the funds. As an example, a quasi-endowment might be restricted by the donor to supporting the tennis team; the use is restricted to one purpose, but the governing board could "invade principal" to support the tennis team.

Types of Endowment Funds

True Endowment funds are received from external donors with restriction that the principal or gift amount is to be retained in perpetuity and cannot be spent.

In Term Endowment funds all or part of the principal may be expended only after the expiration of a stated period of time or occurrence of a specified event, depending on donor wishes.

Quasi Endowment funds must retain the purpose and intent as specified by the donor or source of the original funds and earnings may be expended only for the specified purpose.

Criticisms

Officials in charge of the endowments of some universities have been criticized for "hoarding" and reinvesting too much of the endowment’s income. Given a historical endowment performance of 10–11%, and a payout rate of 5%, around half of the endowment’s income is reinvested. Roughly 3% of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2% annual growth of the endowment. Of course, many endowments fail to earn 10-11 percent.

Two arguments against inflation adjusted endowment growth are:

The future needs the money less than the presentSome claim that the future will be much richer materially than the present due to technological innovation and specialization. In counterpoint, Nobel laureate James Tobin

James Tobin

James Tobin was an American economist who, in his lifetime, served on the Council of Economic Advisors and the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. He developed the ideas of Keynesian economics, and advocated government intervention to...

Intergenerational equity in economic, psychological, and sociological contexts, is the concept or idea of fairness or justice in relationships between children, youth, adults and seniors, particularly in terms of treatment and interactions. It has been studied in environmental and sociological...

.

A constantly growing endowment shields universities from competitive forcesAs the endowment’s reinvestment starts becoming a larger part of its growth, the need for happy students and alumni to donate funds to the university’s budget and endowment is reduced. Therefore, traditional market forces that provide incentives to run a university efficiently may be greatly reduced and at least theoretically lead to university administration not being held accountable for its actions. (This might also be considered a worthy goal, as it would mean the freedom of academia

Academia

Academia is the community of students and scholars engaged in higher education and research.-Etymology:The word comes from the akademeia in ancient Greece. Outside the city walls of Athens, the gymnasium was made famous by Plato as a center of learning...

from financial concerns, which could cause a wider range of research topics to be available to students and faculty.)

Large endowments have been criticized for "hoarding" money. Most philanthropies are required by federal law to distribute 5% of their assets per year, but university endowments are not required to spend anything. Many universities with very large endowments would require less than 5% to pay full tuition for all their students. For example, it has been estimated that if in 2006 all the Harvard students paid the maximum in tuition and fees, it would amount to less than $300 million. In 2007, if Harvard had spent 5% of its $34.6 billion endowment, all Harvard undergraduate and graduate students could attend for free and the university would still have $1.3 billion left over. It would require less than 1% of the endowments of Harvard and Yale

YALE

RapidMiner, formerly YALE , is an environment for machine learning, data mining, text mining, predictive analytics, and business analytics. It is used for research, education, training, rapid prototyping, application development, and industrial applications...

The Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university on an campus located near Palo Alto, California. It is situated in the northwestern Santa Clara Valley on the San Francisco Peninsula, approximately northwest of San...

The Massachusetts Institute of Technology is a private research university located in Cambridge, Massachusetts. MIT has five schools and one college, containing a total of 32 academic departments, with a strong emphasis on scientific and technological education and research.Founded in 1861 in...

Princeton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....

William Marsh Rice University, commonly referred to as Rice University or Rice, is a private research university located on a heavily wooded campus in Houston, Texas, United States...

would require less than 2% of their endowments and 29 schools would require less than 3% for all their students to attend tuition-free. Despite the decreasing values of endowments, congressmen, including Charles Grassley, have questioned whether the endowments are contributing enough to maintain their tax-exempt status. After reviewing work in developing nations by 50 higher education institutions with endowments over $1 billion, Peter Hotez of George Washington University has stated that "pharmaceutical companies are doing more for the poorest people [in the world] than most of our wealthiest universities."

Size

Financial endowments range in size depending on the size of the institution and the level of community support. At the large end of the spectrum, the total endowment can be over one billion dollars at many leading private universities. As an example, Harvard University

Harvard University

Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...

has the largest endowment in the United States with close to $26 billion in assets as of June 30, 2009. However, each university typically has numerous endowments, each of which are frequently restricted to funding very specific areas of the university. The most common examples are endowed professorships (also known as named chairs), and endowed scholarships or fellowships. For instance, Harvard has 10,800 separate endowments.

See also

Endowment tax is taxation of endowments. The city of Cambridge, Massachusetts, has proposed taxing MIT and other major universities on these previously exempt, non-profit earnings. A financial endowment is a transfer of money or property donated to an institution, with the stipulation that it be...

Endowment invasion is when an institution uses the financial endowment to pay off debts and cover the yearly operating expenses. In New York the practice requires approval from the state attorney general’s office and the New York State Supreme Court; by 2009, however, most states have adopted...